Conservative minister denies allegations she claimed expenses for accommodation while staying at a friend’s house for free

Lady Warsi, the Conservative party co-chairman, has been urged to stand down from the cabinet pending an investigation into allegations that she claimed for overnight accommodation when she was staying with a friend rent free.

Sir Alistair Graham, a former chairman of the committee on standards in public life, said on Sunday that Warsi, who strongly denies the allegation, should not continue to sit in the cabinet until a full investigation has been completed.

John Mann, a Labour MP, has already said he will ask Paul Kernaghan, the Lords’ commissioner for standards, to investigate the allegation, which dates back to early 2008.

On Sunday Warsi admitted a separate misdemeanour – failure to include rental income from a flat that she owns in Wembley, north-west London, in the Lords register of interests. She said she had declared this to the Cabinet Office and in the register of ministers’ interests, and the fact that it was omitted from the Lords register was “an oversight”.

But she rejected a claim that, after being made a peer and before buying her flat in Wembley, she claimed expenses to cover overnight accommodation when she was actually staying with a friend for free.

The accusation comes from Wafik Moustafa, who owns the house in Acton, west London, where Warsi stayed for occasional nights in February and March 2008. At the time Warsi was claiming the £165.50 overnight allowance paid to peers for accommodation in London because their main home was elsewhere.

Moustafa, who runs the Conservative Arab Network, told the Sunday Times: “Baroness Warsi paid no rent, nor did she pay any utilities bill or council tax.” But Warsi said she was staying in the house as a guest of Naweed Khan, a Conservative party employee. She said that while she was being put up by Khan she made an “appropriate financial payment” equivalent to what she would have paid if she had stayed in a hotel – which is what she mostly did when in London after becoming a peer in 2007 and before moving into her Wembley flat in March 2008.

Warsi’s story was corroborated by Khan, who issued a statement saying she paid him when she stayed to compensate for the inconvenience caused and the additional costs he incurred.

Under the rules at the time, peers only had to show that they were maintaining a property or incurring an expense staying in London to qualify for the flat-rate overnight allowance. The system was subsequently widely criticised, because it allowed peers to claim the overnight allowance by registering a holiday home in the country as a main residence, and it has now been replaced.

Graham said the allegations were “very muddy and blurred” and there should be a full investigation.

“I personally am always of the view when ministers face very serious allegations that seem to have some strength to them, then it’s better that they stand down from their ministerial post while that investigation takes place,” he said.

Chuka Umunna, the shadow business secretary, also called for a full investigation.

“To rebuild trust and demonstrate this is being dealt with in a proper way there has to be a proper, independent investigation,” he said.

A Tory source said Warsi would be happy to co-operate with any inquiry but did not think the allegation amounted to anything.